Taiwan’s foreign-currency bond market risks losing its relevance just three years after AT&T Inc.’s marquee issuance led a record $60.2 billion of sales.
(Bloomberg) — Taiwan’s foreign-currency bond market risks losing its relevance just three years after AT&T Inc.’s marquee issuance led a record $60.2 billion of sales.
Issuance of Formosa bonds, foreign-currency notes sold on the island, dropped to $2.3 billion in the first quarter, Bloomberg-compiled data show. At that rate, it’ll be far below last year’s $17.4 billion of sales, which was already the least in nine years.
The precipitous decline of the market, once a favorite with global issuers such as Apple Inc. and Intel Corp., mirrors a worldwide slump in dollar debt sales due to the Federal Reserve’s aggressive monetary tightening. Just as worrying, cash-rich Taiwanese insurers — the biggest buyers — are pulling back as they struggle with weaker earnings and higher hedging costs.
The rapidly shrinking market that came into existence in 2006 also marks a setback for Taiwanese authorities in nurturing a vibrant financial industry to help cut the economy’s reliance on exports and stop a brain drain to regional rivals like Singapore and Shanghai.
“Who wants to sell debt when interest rates are so high right now?” said Tsai Ling Chao, executive vice president of Fubon Life Insurance Co., Taiwan’s second-biggest life insurer by assets. “We also can invest directly overseas, rather than via the Formosa bond market.”
Local insurers own more than 75% of Formosa bonds outstanding, according to Bloomberg calculations. They played a pivotal role in expanding the market, especially after regulators in 2014 exempted Formosa debt from a cap on the industry’s overseas investments, a decision reversed four years later.
The otherwise obscure local market made its presence felt globally in 2020, when a combination of low interest rates and Taiwanese insurers’ flush liquidity generated record Formosa bond sales. The strong hedging needs resulting from the issuance boom even caused ripples in the Treasuries market at that time.
In its heyday, Formosa debt drew prominent issuers from tech firms like Verizon Communications Inc. and Comcast Corp. to Wall Street giants including Goldman Sachs Group Inc. and Morgan Stanley. Middle Eastern borrowers such as the Qatari government and First Abu Dhabi Bank PJSC have also issued the notes in recent years.
Longer term, the market’s contraction also bodes ill for Taiwan’s policymakers, who initially designed the venue as part of a larger effort to coax banking business back to the island. With a limited range of products at home, local financial firms have poured into foreign investments over the years, denting the island’s appeal to domestic talent.
“One of the key objectives for the regulator to establish the international bond market is to enhance the internationalization of the domestic capital market via attracting overseas corporates to issue and list their bonds in Taiwan, and encourage both overseas and domestic investors to purchase these bonds,” said Kelvin Kwok, an analyst at Moody’s Investors Service.
A rebound in Formosa debt sales may emerge after the Fed’s tightening cycle ends, said Kevin Lin, general manager of the bond department at Taipei Exchange at a recent press conference. But no significant increase is expected before the local life insurers restore their “investing power,” Lin added.
“The borrowers don’t have to sell notes in Taiwan if the buyers are not there,” said Moody’s Kwok.
–With assistance from Argin Chang.
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